Affleck Inc.'s business is booming,and it needs to raise more capital.The company purchases supplies on terms of 1/10,net 20,and it currently takes the discount.One way of acquiring the needed funds would be to forgo the discount,and the firm's owner believes she could delay payment to 95 days without adverse effects.What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year. )

Question

Quizplus · Accepted Answer

By taking the discount, the cost of funds is:

(1 - 0.01) / (1 - 0.01 * 20/365) - 1 = 0.0366 or 3.66%

By forgoing the discount and delaying payment to 95 days, the cost of funds is:

(1 - 0.01 * (365/95)) / (1 - 0.01 * (365-95)/95) - 1 = 0.0441 or 4.41%

Therefore, the effective annual percentage cost of funds raised by this action is 4.41%.